By Tom Burnett CFA
We are early in the year 2022, but the important story for investors is the sharp upturn in interest rates during the first trading week of the year. The yield on the 10-year Treasury bond is now trading at 1.67%. When the Federal Reserve announced in mid-December its intention to cut back its monthly bond purchase program, the yield on the 10-year Bond was 1.41%. One year ago, the yield was 1.07%. Similarly, the yield on the 30-year Treasury Bond has risen to 2.07% from 1.81% in mid-December. The impact of rising rates can be seen by the price decline in the Index of 20+year Treasury which is already down by 3.0% this year (WSJ.com).
Rising rates could slow economic growth and raise costs for companies that will put negative pressure on corporate profits. In addition, rising rates make non-stock investments more attractive. The S/P 500 Index now offers a dividend yield of just 1.3%, compared to the 1.67% yield on the 10-year Treasury Bond. Equity investors should monitor these rate movements carefully as they make their stock market decisions.
The next public Federal Reserve meeting is a two-day event on January 25-26.
Tom Burnett CFA is Director of Research.